Prime Minister Silvio Berlusconi on Wednesday confirmed he would resign after implementing urgent economic reforms demanded by the European Union, and said Italy must then hold an election, in which he would not stand.

We have to give Europe and the world an urgent, strong signal that we are taking things seriously, he told a morning television show by phone.

After failing to secure a majority in a vote in the lower house on Tuesday night, Berlusconi said he would quit as soon as parliament passed budget reforms to help Italy stave off a debt crisis that is threatening the entire euro zone.

Berlusconi, who has been under pressure to resign for weeks as markets pummeled Italy, also said his decision to resign was a gesture of responsibility to the country.

But he said he was opposed to any form of transitional or national unity government -- which the opposition and many on the markets favor -- and that an early election was the only alternative.

Markets showed little or no relief that a man they saw as an obstacle to economic reform planned to leave office.

The yield on Italy's 10-year benchmark bonds rose sharply to near 7.00 percent, a level widely seen as unsustainable at which Portugal, Greece and Ireland were forced to seek a bailout. Italy's FTSE MIB index fell 3.0 percent.

ALFANO PROPOSED

In a separate interview with La Stampa newspaper, Berlusconi said he saw an election being held at the start of February and that PDL party secretary and former justice minister Angelino Alfano would be the center-right's candidate for prime minister.

I will resign as soon as the (budget) law is passed, and, since I believe there is no other majority possible, I see elections being held at the beginning of February and I will not be a candidate in them, he told La Stampa newspaper.

Berlusconi's delayed resignation is highly unusual in Italy and several leftwing newspapers suggested he might be playing for time and would not eventually step down. But he gave a string of interviews on Wednesday underlining that he would resign.

Commentators said the fact that President Giorgio Napolitano had announced the resignation plan in an official statement would make if extremely difficult for Berlusconi to renege. They suggested his priority now was to keep his center-right coalition in power.

Votes on the economic reforms in both houses of parliament are likely this month. Opposition leaders may try to bring them forward in order to end as soon as possible the flamboyant billionaire media tycoon's 17-year dominance of Italian politics.

Worries about the Berlusconi government's ability to implement reforms to boost Italy's sluggish growth and cut its huge debt have helped fuel a rise in Italy's borrowing costs to unsustainable levels, weighing on the euro and stock markets.

Global equity markets and the euro rose after Berlusconi's decision on hopes that a new leader will act more aggressively to tackle the crisis in the euro zone's third largest economy, which is jeopardizing Europe's single currency project.

CONSULTATIONS

Napolitano said he would start consultations with all political parties after the new budget measures were approved.

When a government is defeated or resigns, it is the president's duty to appoint a new leader to try to build a majority in parliament, or call an election.

Pier Luigi Bersani, leader of the opposition center-left Democratic Party, repeated a proposal to form a transitional government spanning the political spectrum.

Berlusconi and his closest allies a government of technocrats -- an option favored by markets and, it is thought, Napolitano -- would be an undemocratic coup against the 2008 election result.

EU inspectors were due to arrive in Rome on Wednesday to begin a monitoring mission aimed at ensuring economic reforms are carried out as part of an agreement reached at a G20 summit last week.

Even when Berlusconi goes, there is no guarantee that reforms will be quickly implemented, and relief on markets may not last long.

The cost of using Italian bonds to raise funds rose after the clearing house LCH.Clearnet SA increased the margin Italian debt. [nL6E7M9192]

When LCH.Clearnet took similar action on Portuguese and Irish debt as bond yields soared, it added to selling pressure on the paper. Both countries were later forced to seek bailouts.

(Additional reporting by Giselda Vagnoni and Stefano Bernabei; editing by Barry Moody and Kevin Liffey)

Portugal